Analysis of the 2004-05 Budget Bill

Legislative Analyst's Office
February 2004

The Governor's budget proposal includes major reductions in higher
education, including the elimination of General Fund support for outreach
programs at the University of California (UC) and the California State
University (CSU), increases in UC and CSU's student-faculty ratios, a
7.5 percent reduction in funding for academic and administrative support
at UC and CSU, new restrictions and reductions for state financial aid programs,
and unallocated reductions. These reductions, however, would be backfilled in
part by proposed increases in student fees at the two segments. The budget
proposal would reduce freshman enrollment at UC and CSU, while increasing
enrollment at the California Community Colleges by about 35,000 full-time
equivalent students.

While the state's fiscal situation justifies efforts to achieve
General Fund savings in various areas, including higher education, we are
concerned that the Governor's proposal does not adequately safeguard student
access to postsecondary education. In this section, we outline our recommended
changes to the Governor's budget, which we believe would better preserve
student access. Details of our specific proposals appear immediately after this
introductory section.

The Governor's budget for higher education involves policy and budget
changes in a number of interrelated areas. Among these are K-14 outreach
programs, budgeted enrollment, student fees, and financial aid. Major proposed
changes in these areas are summarized in Figure 1.

aUC = University of California;
CSU = California State University; and CCC = California Community
Colleges.

bFee increases are used to offset proposed General Fund
reductions. The negative amounts shown here reflect these reductions.

We recommend a number of changes to the Governor's proposal that in our view
would (1) better preserve student access to higher education, (2) make
better sense on policy grounds, and (3) achieve a similar level of General Fund
savings. We summarize the Governor's major proposals and our recommendations
below:

Governor's Proposal Would Eliminate State Support. The state
supports many K-14 outreach programs that focus on preparing students from
disadvantaged backgrounds for college. The Governor's budget proposes to reduce
funding for these programs at the University of California (UC) and the
California State University (CSU) in both the current year and budget year. For
2003-04, the Governor proposes (pursuant to Section 27.00 of the 2003-04
Budget Act) to reduce General Fund support for outreach at the two
universities by $24.7 million. For 2004-05, the Governor proposes an
additional $60.6 million in reductions, thus eliminating all General Fund
support for UC and CSU outreach programs. The budget does include
$43.2 million in General Fund (Proposition 98) support for the
California Community Colleges' (CCC) outreach efforts, including
$37 million for financial aid outreach.

LAO Recommendation—Establish College Preparation Block Grant. In
the "K-14 Outreach Programs" intersegmental section immediately
following, we assess the state's current outreach efforts and present a
framework for improving the effectiveness and efficiency of these efforts.
First, we recommend the creation of a College Preparation Block Grant targeted
at K-12 schools with very low college participation rates. Under our proposal,
K-12 schools would have the flexibility to contract with UC, CSU, or other
providers for outreach services. This block grant could be funded by
redirecting $30 million from community college financial aid outreach in
the budget year.

In addition, we recommend that the Legislature redirect the
$3.5 million proposed for dual admissions counseling to preserve selected
outreach programs at UC and CSU, in order to more accurately target limited
resources at students most in need of college preparation. Overall, our
proposal allows the Legislature to achieve the same amount of General Fund
savings as proposed by the Governor, while still providing outreach services
for disadvantaged students.

Governor Proposes No Enrollment Growth Funding for UC and CSU. In
keeping with legislative intent expressed in the 2003-04 budget package, the
Governor's proposal includes no new funding for enrollment growth at UC and
CSU. In fact, the Governor proposes to reduce new freshman enrollment at UC and
CSU by 10 percent, with the forgone enrollment being directed to CCC
through a new dual admissions program. Under this program, students who are already
eligible to attend UC or CSU directly from high school would be admitted to
a specific campus, provided they first complete a transfer program at a
community college. Partially in recognition of this diverted enrollment, the
Governor's budget increases funded enrollment at CCC by 3 percent.

LAO Finding—UC and CSU Have Room to Accommodate Additional Students. As
discussed in our recent report, Maintaining the Master Plan's Commitment to
College Access, we believe the segments are currently drawing students
outside their Master Plan targets and thus would have room to accommodate
additional eligible students if they realigned their admissions criteria
with Master Plan guidelines. Moreover, both UC and CSU have enrollment growth
funding in their base budgets that they can use in 2004-05 to serve additional
students above their actual current-year enrollment levels.

LAO Recommendation—Encourage Community College Participation on
Voluntary Basis. We recommend establishing a policy similar to the
Governor's proposal, whereby UC and CSU would admit qualified freshmen but
redirect a portion of them to enroll in community colleges for their lower
division coursework. Under our proposal, students would be redirected on a voluntary
basis, and the university would encourage participation by guaranteeing a
student's admission to his or her first-choice campus. We discuss this
recommendation, as well as our findings concerning UC and CSU's enrollment
funding and admissions policies in the "Higher Education Admissions and
Enrollment" intersegmental section.

Governor Proposes Various Fee Increases and Long-Term Fee Policy.
The Governor's budget achieves approximately $390 million in General Fund
savings by increasing student fees at all three segments of higher education.
The size of these increases ranges from 10 percent for undergraduates at
UC and CSU to 40 percent for graduates at UC and CSU. Although community
college fees would increase by 44 percent, the low level of the current
fee means that the average full-time student would pay less than $200 per year
in additional fees. In order to guide the setting of future fee levels, the
Governor proposes a long-term fee policy intended to make future fee
adjustments moderate and predictable. However, the Governor's proposal would
not include CCC fees, professional school fees, or nonresident tuition under
the long-term policy.

LAO Recommendation—Establish Clear Basis for Long-Term Fee Targets,
Adopt Some of the Proposed Fee Increases, and Modify Others. We agree
that the state should adopt a long-term fee policy that ensures moderate and
predictable annual adjustments to student fees. However, we believe the
Governor's proposal lacks a meaningful basis for setting fee targets. We also
believe the fee policy should extend to all student fees, including
those paid by community college students, professional school students, and
nonresident students. Finally, we believe the Governor's proposal violates its
own stated policy by increasing graduate fees too quickly.

In the "Student Fees" intersegmental section, we propose a
long-term fee policy that sets student fee levels at a fixed percentage of
total educational costs. We believe this establishes a meaningful basis for
student fees that acknowledges both the private and public benefits that are
derived from higher education. Moreover, our suggested policy would extend to
all types of students. We also recommend that the proposed increase in graduate
student fees at UC and CSU be slightly reduced to a more reasonable level. We
also identify ways that this foregone fee revenue could be made up from other
areas.

Governor Proposes New Restrictions, Reductions for Cal Grants.
The Governor's budget proposal would add new restrictions on the state's Cal
Grant programs, lowering the income eligibility ceilings for both Cal Grant A
and Cal Grant B. In addition, the proposal would break with longstanding
practice by not increasing the Cal Grant award amounts for UC and CSU
students to reflect the proposed fee increases. The proposal also reduces the
Cal Grant award amount for needy students attending private universities. At
the same time, the Governor's proposal would increase financial aid funding
that UC and CSU administer themselves.

LAO Recommendation—Preserve Integrity of Cal Grant Program. In
the "Financial Aid" intersegmental section, we express concern that
the Governor's proposal would undermine the integrity of the Cal Grant program.
In recent years the Legislature has made important strides in ensuring that
needy students are provided with a level of financial support to ensure their
access to higher education. By "decoupling" the Cal Grant award
amount from the level of student fees at UC and CSU, the Governor's proposal
would weaken state assurances that Cal Grants—especially those under the
entitlement program—will address their financial needs. The proposed reduction
of the Cal Grant award for students at private colleges similarly undermines a
long-standing practice to link aid awards to anticipated costs.

We therefore recommend that the Legislature reject the Governor's proposals
to reduce Cal Grant awards and further restrict eligibility. We recommend that
the General Fund savings the Governor envisions from those actions instead be
achieved by reducing the planned increases in UC and CSU's institutional
financial aid programs. In this way, the state would preserve the integrity of
statewide financial aid programs that are geared to all students,
including those attending UC and CSU.